Monday, May 16, 2011

BOOST O2 | BOOKS by Barry Ritholtz | > Sharpen your Investing Skills

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By Barry Ritholtz 

One of the most common emails I get from new readers is “What books should I look at to learn about markets, economy, and investing?”

Investing is such a competitive arena that no matter how good you think you are, it is important that you constantly develop new skills and improve your knowledge base. You cannot afford to simply stand still.
How can you do this?

By learning as much as possible about how the markets operate, what makes the economy work, about new trading concepts and various schools of investing thought.
Don’t think of this as light reading. While digesting any investing-related material, you must do so actively, with a keenly skeptical eye. At the same time, you need to have an open mind. Doing both at once ain’t easy.
As part of my ongoing education regimen, I try to read 10 to 20 market/economic/trading-related books per year. This is on top of my regular research and media diet. If out of that list, I find three books that are truly worthwhile, it’s been a good year (this year was excellent). After 15 years of this, I’ve found quite a few books that are truly terrific, and should be of interest to any investor thirsty to learn.
Think of what follows as a course offering for those who want to improve their knowledge and skills. These were chosen for their readability, their wisdom, and their timelessness.


The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation (A. Gary Shilling)
All the Devils Are Here (Bethany McLean, Joe Nocera)
Art of Contrary Thinking (Humphrey Bancroft Neill)
Bailout Nation (Barry Ritholtz)
The Big Short (Michael Lewis)
Chasing Goldman Sachs (Suzanne McGee)
Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America (Greg Farrell)
The Creature from Jekyll Island: A Second Look at the Federal Reserve (G. Edward Griffin)
Griftopia (Matt Taibbi)
Inflated: How Money and Debt Built the American Dream (R. Christopher Whalen)
Lords of Finance: The Bankers Who Broke the World (Liaquat Ahamed)
More Money Than God: Hedge Funds and the Making of a New Elite (Sebastian Mallaby)
Zombie Economics: How Dead Ideas Still Walk among Us (John Quiggin)
13 Bankers (Simon Johnson, James Kwak)


Introduction to Investing

Any one of these books will give you insight into investing and the markets. All three will make an essential base for future studies:
Stock Market Wizards : Interviews with America’s Top Stock Traders by Jack D. Schwager
Jack D. Schwager: Stock Market Wizards : Interviews with America's Top Stock Traders
Schwager interviewed market legends at the height of their success. What makes the book so worthwhile are the consistent themes that evolve from currency traders, mutual fund managers, commodities traders, hedge fund managers. Regardless of what is being traded, there are related motifs that run throughout.
What results is not a “How to trade” book; instead, it is a book about “How to think about trading.”
This has become a seminal book on trading and investing. I actually re-read Market Wizards every five years — it is that good. Wizards was so well received by the financial community that the same author put out The New Market Wizards. Whether you read one or both of these books, you will have knowledge of the market from both the trader’s and the investor’s perspectives.
The Investor’s Anthology: Original Ideas from the Industry’s Greatest Minds by Charles D. Ellis
Charles D.  Ellis: The Investor's Anthology: Original Ideas from the Industry's Greatest Minds
Instead of interviewing famed investors, Ellis gathered their best writings into one collection. He ends up with a series of short chapters by luminaries of days gone by. There is something worthwhile on just about every page. This is another favorite worth rereading every few years.
Bull: A History of the Boom and Bust, 1982-2004,  What drove the Breakneck Market — and What Every Investor Needs to Know About Financial Cycles by Maggie Mahar
Maggie Mahar: Bull: A History of the Boom and Bust, 1982-2004
The best book about the past 20 years of the market, bar none. Mahar does a terrific job weaving the long tale of how things eventually reached their penultimate top in 2000. She spares no one — the government, the Fed, Wall Street, her colleagues in the financial press — all are subject to a scathing critique for their complicity in inflating the bubble.
Bull! reads like a historical work, despite the recentness of its subject. There are a surprising number of lessons buried in these pages that will reward the careful reader. I found it both fascinating and informative.


Historical Perspectives

It’s astounding how little things have changed over the past century. Yes, information moves more quickly, and computing power has allowed for a more quantitative analysis of stocks — but human nature remains immutable.
How I Trade and Invest in Stocks and Bonds by Richard Wycoff
Richard D. Wyckoff: How I Trade and Invest in Stocks and Bonds (Contrary Opinion Library)
Quite simply, this is one of my favorite books on the markets and investing. The fact that it is from 1923 is totally irrelevant. If I could reprint the book with each mention of “coal” replaced with “oil,” and if I substituted “Internet” for any time the word “railroads” appeared, you would have no idea when this was written. Indeed, you would think it was a current work.
There is probably more market intelligence and trading wisdom in this book per word than any other I have ever read. I strongly recommend this one.
Reminiscences of a Stock Operator by Edwin Lefevre
Edwin  Lefèvre: Reminiscences of a Stock Operator (A Marketplace Book)
By now, you have probably heard the story of Jesse Livermore. If you have ever said, “The trend is your friend” or “Let your winners run and cut your losses quickly,” then you were quoting Livermore — even if you didn’t know it.
This is an absolutely exhilarating read. In fact, it is so much fun, it shouldn’t count as homework or research.
Coincidentally, this was also published in 1923 — apparently a good year for market-related books.



As a species, we are notoriously bad at understanding our own thinking and emotions. We are even worse at predicting our own behavior. Understanding your own mind and those of your fellow investors is crucial to successful investing. These books will go a long way to helping you understand your hardwired weaknesses and blind spots.
Thomas Gilovich: How We Know What Isn’t So by Thomas Gilovich
Thomas Gilovich: How We Know What Isn't So
This is one of the most influential investing books you will ever read. So many of our own foibles are detailed here that it is almost embarrassing. Everything from unsuspected biases to how we engage in critical reasoning comes under scrutiny. What it reveals isn’t pretty. Despite the genius that is human achievement, it turns out that we are all very poor at comprehending complex data and analyzing risk.
This book will help you understand how your brain: processes randomness; overlooks evidence that is inapposite to prior beliefs; selectively perceives and reinterprets data; and engages in selective recall. It’s how we all create an artificial story line to help make sense of otherwise incomprehensible data.
Once you finish this book, you will never look at investing the same way.
Note: This is purely psychology writing; If you prefer a more specific investing-related analysis, consider Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics by the same author (with Gary Belsky).
Gary Belsky: Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
Hard-core fans of cognitive biases and economic anomalies (and other similar type of analyses) will also appreciate Richard H. Thaler’s The Winner’s Curse. Thaler is one of the most influential researchers in the field of behavioral economics.
Richard H. Thaler: The Winner's Curse
If you want to see how cognitive and reasoning deficits manifest themselves, then the seminal book on the subject is Extraordinary Popular Delusions & the Madness of Crowds by Charles Mackay. There have been a lot more booms and busts then you imagine. This book details how they came about and their impact throughout history. Fascinating and instructive stuff.
Charles Mackay: Extraordinary Popular Delusions & the Madness of Crowds
Once you understand how our brains fool us into occasionally doing idiotic things — funny, but it seemed perfectly reasonable at the time — then you can start looking for ways to avoid making those gaffes. Humphrey Neill’s Art of Contrary Thinking will show you the way. He explains why “When everyone thinks alike, everyone is wrong.” This intriguing thesis applies not only to markets, but to politics, academia, even sports.
Humphrey B. Neill: Art of Contrary Thinking

What if human nature can never learn from its mistakes? What if we are doomed to repeat the aforementioned cognitive, reasoning and behavioral defects over and again? That provocative thesis is put forth by Robert R. Prechter Jr.: Prechter’s Perspective. This is the book that explains why our own nature leads to history repeating so often.
Robert R. Prechter Jr.: Prechter's Perspective

A few caveats: I am not a devotee of Elliot Wave theory (Prechter’s school of choice). Further, I hasten to add that many of Prechter’s market calls have left much to be desired. However, his overarching perspective of human nature, and of history’s cyclical tendencies, makes for utterly fascinating reading. Even though I found myself arguing with many of the premises in the book, I enjoyed this thoroughly. The cycle geeks out there will too.
In part 2 of the series we’ll look at books focused on economics, Wall Street, technical analysis, fundamentals, shorting, and miscellany.


Wall Street

If you can understand how the crazier things happen on Wall Street, you may avoid some investing pitfalls. These two books offer insight into that arena — and they could just as easily be filed under how to raise problem children.
Fred Schwed’s Where Are the Customers’ Yachts? or A Good Hard Look at Wall Street. Schwed worked on Wall Street for a few years, and his book — written 60 years ago — is a delightful read, full of insight into both the Street and investors’ psyches.
For those of you thinking about working in the industry, then Liar’s Poker by Michael Lewis is for you. It provides a snapshot into a major firm circa the 1980s. As much as things have changed since then, they are still very much the same.



Understanding where we are in the business cycle — expansion, plateau, contracting, bottoming — is crucial to understanding where the markets will be in 6-18 months.
My favorite introductory econ book is Todd G. Buchholz’ New Ideas from Dead Economists. Buchholz’s survey of the history of economic thought is lively and informative. He avoids politics and academic squabbling, resulting in an extremely enjoyable, informative book. That’s saying a lot for a subject that in the hands of a lesser writer would be dry and boring. Were I to recommend but one economics book for the layperson, this would be it.
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. Dubner. This is less a book about economics, and more a book about how to approach challenging problems from a logical perspective. Outside-the-box thinking combined with intelligence, creativity and mathematics makes for a potent combination. But don’t let the math intimidate you — it’s a delight to read, and is very accessible to the nonmathematician/noneconomist.
The most serious of the econ books is Beating the Business Cycle by Lakshman Achuthan and Anirvan Banerji. Anticipating when the business cycle is about to turn is a trick most economists are exceedingly poor at; Achuthan and Banerji show you how to do it. If you find that the previous two econ books whet your appetite, then consider this your graduate-level reading.



You learn technical analysis not by reading about it, but by looking at thousands of charts over the course of many years. That makes recommending any books on TA challenging. I picked the following because they either illuminated a particular segment of TA or were extremely accessible to the nontechnician.
Getting Started in Technical Analysis by Market Wizards author Jack Schwager covers all the basics: moving averages, trend lines, patterns, support and resistance. Another good book to get started with TA is The Visual Investor by John J. Murphy. Either of these will give you a broad overview of technical analysis.
My favorite of the new [2005] TA books is Trend Following by Michael Covel. Straightforward, easy to read, this book is rich in details about why trend following is such a successful strategy amongst some of the world’s best-performing hedge funds.
How to Make Money in Stocks by William J. O’Neil. O’Neil, founder of Investor’s Business Daily, created a quantitative and technical-based trading system called CANSLIM. Although I am not a follower of this methodology, it has much to offer to the novice. If you are an IBD reader or are curious about his philosophy, this book is a good place to start.
I’ve read several books that RealMoney’s Gary B. Smith has recommended, including How Charts Can Help You in the Stock Market by William L. Jiler, and How I Made 2,000,000 in the Stock Market by Nicolas Darvas. I would suggest both of them to readers who want more details and background to how several successful technicians have made their fortunes in the past.
I occasionally find myself looking at a chart and wondering what the heck it means. That’s why I have a small reference library on my desk. It includes:
Technical Analysis from A to Z by Steven B. Achelis;
Encyclopedia of Chart Patterns by Thomas N. Bulkowski;
Japanese Candlestick Charting Techniques by Steve Nison;
Technical Analysis of the Financial Markets by John J. Murphy.
Don’t think you need a full reference library; all you need is one reference book to help you occasionally.


Short Selling

Surprisingly, there haven’t been too many books on shorting — or even on the art of selling. One I like is Sy Harding’s Riding the Bear: How to Prosper in the Coming Bear Market. It came out in late 1999 — how’s that for auspicious timing! If the “buy & hold” investors had read this back then, they would have saved a lot of money. It’s just as sensible today.
Another well-timed book is When to Sell by Justin Mamis. This was published in 1970s. It’s a bit slow going, but is filled with good observations about developing a sell strategy.
A basic approach to shorting is William J. O’Neil’s How to Make Money Selling Stocks Short. Pure fundamentalists should be forewarned: it is very technically driven, and may be hard going for those with an aversion to charts. That’s just as well; fundamentals can tell you what to buy, sell or short — but not when. And timing is especially crucial when it comes to shorting.



Given my inclination towards quantitative, trend, sentiment and macro economics, I am admittedly an outsider on pure fundamentals. But I have found these books to be valuable additions to my knowledge base.
Stocks for the Long Run by Jeremy Siegel is a terrific overview of all things equity. It’s a great place to start, although many fundamentalists would advise you to begin with The Intelligent Investor by Ben Graham, which is considered the bible of value investing. [UPDATE: There are data problems with Siegel's book that challenge its basic premises. Irrational Exuberance by Robert Shiller argued Jeremy Siegel was wrong: markets are risky, stocks are over-priced. I'm in Shiller's camp. See also Fooled by Randomness by Nassim Nicholas Taleb, who writes that Markets are very random; watch out for black swan events.]
I find Warren Buffett intriguing. His annual reports are legendary; reading them is an education in itself. Start with Warren Buffett Speaks: Wit and Wisdom from the World’s Greatest Investor by Janet Lowe. If you want the unvarnished words from the man himself, then choose The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffett.
I would be remiss if I left out Peter Lynch. You can read any of his books, but I like One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. Lynch shows how people can use their own experience to gain an edge on Wall Street.



There were lots of worthwhile books that didn’t make the cut for one reason or another. Some of them — like Bull’s Eye Investing by John Mauldin were a bit too advanced for the apprentice. Others cover a single topic. If the entire book can be adequately summed up in one line, then I can save you eight hours.
The Tipping Point: How Little Things Can Make a Big Difference by Malcolm Gladwell. I thoroughly enjoyed this book, but if you want to save time, the punch line is that complex systems are nonlinear.
The Wisdom of Crowds by James Surowiecki. The book is thought-provoking and interesting but, unfortunately, I found too many logical flaws in it; further, it seems to be too tied to the efficient market hypothesis. (Bottom line: The crowd is right until they become an unthinking mob.)
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle. (Wall Street charges too much, you are a lousy investor anyway, buy index funds.)
Chaos by James Gleick. Want to understand the mathematical science — physics, actually — of what really drives the market’s behavior? Then this book is for you. (Bottom line: Markets are not truly random, but have qualities which include persistence, sensitivity to initial conditions and nonlinear dynamics.)
The (Mis)Behavior of Markets by Benoit Mandelbrot. Chaos theory as applied to markets by fractal geometry’s creator. Warning: this book may make your head explode.
Originally published:
Apprenticed Investor: More Reading Ideas
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